Yuan's Depreciation Against Dollar to Stop in Second Half of This Year, JP Morgan Says

Yicai Global

DATE : Jan 16 2017/SOURCE : Yicai

Yuan's Depreciation Against Dollar to Stop in Second Half of This Year, JP Morgan Says

(Yicai Global) Jan. 16 -- The yuan's depreciation vis-a-vis the US dollar will cease in the second-half of 2017, said Zhu Haibin, chief economist at JP Morgan Chase & Co. The dollar is expected to weaken against other major currencies in the period, which should reverse the yuan-dollar exchange rate.

The Chinese currency is expected to keep weakening against the dollar in the first half because China's central bank will not give up the current central parity mechanism in so short a time, said Zhu. The dollar's rise may lead to an exchange rate of 7.2, but will weaken against other currencies and increase the value of the yuan to around 7.1 per dollar, he added.

The central parity mechanism is based on the previous day's closing price and the exchange rate changes against a basket of currencies, with the yuan's exchange rate largely depending on the trajectory of the dollar against other currencies. The yuan has been weakening against the dollar since last October, but recent signs of a weaker US currency are opening up a rebound opportunity for the yuan.

A basic JP Morgan forecast gives China's 2017 economic growth at around 6.5 percent, but domestic and international uncertainties could affect the figure. From a cyclical perspective, 2017 will see some downward pressure on the economy, with the real estate, auto and financial sectors making the biggest impact, said Zhu.

The real estate market will be moderately adjusted, and investment will be expected to return to 1 percent or 0 to 2 percent in 2017, said Zhu. "The slowdown in real estate, a very important pillar industry in China, will have a certain role in the economic downturn."

"From a macro-prudential and financial stability perspective, special attention needs to be given to corporate debts and when to break the rigid redemption of state-owned enterprises in the process of cutting overcapacity," he added.

"In 2017, China's government will adopt a more positive fiscal policy, with a fiscal deficit target higher than in 2016," Zhu said. "The fiscal deficit target was 3 percent of GDP in 2016 and may rise to 3.5 percent in 2017. Monetary policy is likely to continue the relatively neutral tone kept since the second half of 2016."

"For neutral monetary policy, the current view is that China's central bank will be very cautious in the use of traditional tools," he said. "It may cut interest rates once and may not reduce the deposit reserve ratio. Credit growth will be relatively stable, and the M2 growth target will be reduced from 13 percent to 12 percent in 2017."